Financial Planning: Building an Emergency Fund

We don’t have abilities to see the future or guess the hurdles ahead. This makes saving up an emergency fund vital for you financial security, this is because you’re never given a warning of an impending setback such as an accident that keeps you from working or a catastrophic vehicle failure. It also serves as the safety net with the ability to save you from bankruptcy.

Saving up a small rainy day balance should be the vital part of your financial goal. This is incredibly important if you don’t have funds readily available for covering and dealing with unanticipated occurrences. This will provide financial security since it gives you money fall back to when you’re struck down by illness, your partner loses a job or you incur the onset of an enormous medical bill. You don’t want to find yourself in the situation where you’ll have to buy necessities with a credit card and end up paying inflated interest rates of up to 18%.

Saving money in a small account for emergency purposes is the best alternative. If you open a loan account you’re faced with the added burden of paying large amounts of interest. Cashing your investments before maturity means you’ll lose the interest and also a portion of your original investment. This will no doubt set back your financial plans.

To successfully build emergency funds you’ll need to save money regularly and resist dipping into it for non emergencies. The best bet is to keep the money separate from your general saving account. You should invest a substantial percentage of this fund into low risk funding. This will ensure that the money is very liquid and that your investment will not lose value. You’ll be able to access it quickly if you desperately need to.

The size of this special account will ultimately depend on your situation. Many people like to keep a full 6 months of their salary in reserve. The best thing to do is decide the amount based on factors like the number of dependants you have and your fixed monthly outgoings.

If you’re single and have zero obligations with a reliable group of friends who could assist in an unforeseen financial crisis it’s possible you don’t need to stash such a substantial figure in the fund. The more people who rely on you for support though, the more important it is that you have a bigger reserve fund.

When you decide your emergency fund, you must take the difficulty you’d face when looking for new work into account. If you live in a two income household, the contributions of both people should be calculated into the fund.

You might not have the ability to get the emergency fund money at once. Just treat it like a financial goal, one that you add to over time. Should you receive a tax refund, place it in your fund account.

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